Often overlooked in discussions of what some analysts refer to as the “Asian century” is a country that, until recently, was the largest economy in the region: Japan.
The past two decades have been unkind to Japan. It has grappled with a long period of economic malaise following the collapse of its stock and real estate markets in the early 1990s, deteriorating public finances, the onset of negative population growth, and – more recently – natural disasters. Many decision-makers in North America appear to believe that Japan no longer matters. But it would be a mistake to ignore the country.
Consider, first, that Japan is still has the world’s third biggest national economy, behind the U.S. and China. And it is a fairly prosperous one: per capita gross domestic product is US$36,900, using purchasing power parity exchange rates. This puts Japan ahead of many European countries and makes it four times richer than China. Japan is highly productive, owing to its well-educated population, strong manufacturing sector, and modern infrastructure. Over the period 1990 to 2010, Japan led the G8 countries in productivity growth, despite its well-advertised macroeconomic and structural problems.
Japan is an influential trading nation, ranking as the world’s 4th largest exporter; it is also the 4th biggest import market. Endowed with few natural resources, it has evolved to become a leading global supplier of sophisticated products, particularly manufactured goods.
Japan has a strong base of human capital. Adult literacy is just a notch below 100 per cent. High school completion is almost universal, post-secondary attainment rates are relatively high, and the country hosts six of the 100 top-ranked global universities. Two areas of persistent weakness are female labour force participation, where it lags behind other developed countries, and its failure to use immigration to augment workforce skills and mitigate the problems posed by population decline.
Japan is home to a significant number of global-scale enterprises. According to Fortune magazine’s Global 500 publication, 62 of the world’s 500 largest corporations – including six of the top 50 – are headquartered in Japan. (Canada is home to just nine). Japanese firms are well represented among the ranks of the world’s leading producers of automobiles, machinery and equipment, insurance, heavy manufacturing, and trading.
Geographically, Japan is ideally situated to benefit from ongoing economic development in broader Asia. Since the early 1990s, it has expanded and deepened commercial connections with other Asian markets, and Japanese corporations are among the most prominent investors in the region. Japan today is a critical link in Asian-centric global supply chains.
Japan’s debt-burdened public sector undoubtedly will act as a constraint on the country’s future growth. Gross government debt has reached an alarming 235 per cent of GDP, the highest among all advanced countries. Yet interest rates have long been at rock-bottom levels, and the government seemingly has no trouble financing its massive debts. It turns out that the Japanese public sector also holds extensive financial assets, which serve to partially offset its aggregate debt, leaving a net debt burden closer to 130 per cent of GDP (still high, but not much more so than in several European nations).
Moreover, Japan is a comparatively low-tax jurisdiction, with taxes collected equal to 33 per cent of GDP, well below the average for all advanced economies. This means it has room to increase taxes to assist in putting government finances on a firmer footing.
Finally, while Japan’s public sector is heavily indebted, in a macroeconomic sense the country is a net creditor to the rest of the world, in the amount of some $3 trillion. This reflects Japan’s high household saving rate, coupled with the large stock of Japanese investment abroad. On this metric, Japan, perhaps surprisingly, may be in a stronger financial position than some other nations with proportionately smaller government debt burdens.
Japan has gained some momentum since Prime Minister Shinzo Abe and his party assumed office last year and launched an aggressive program – including additional fiscal stimulus, an unprecedented monetary policy commitment to reverse years of deflation, and structural reforms aimed at both fostering greater competition in the domestic market and boosting the economy’s productive capacity – to accelerate economic growth.
It is too early to know how successful “Abenomics” will be. But Japan’s economy grew by almost 2 per cent in 2012, and The Economist Intelligence Unit sees real GDP expanding by 1.7 per cent this year and 2.1 per cent in 2014. These are decent GDP growth rates for a country with an aging and slowly shrinking population.
Canada’s two-way trade with Japan reached $25 billion last year, with 3,000 Canadian firms exporting to the country. Direct Japanese investment in Canada stands at $15 billion. By any measure, Japan remains an important economic and political partner for Canada. In the rush to strengthen Canada’s commercial presence in the Asia-Pacific, it is important that we not neglect relations with Japan.
Jock Finlayson is Executive Vice President of the Business Council of British Columbia.